Italian political dysfunction is nothing new. Italian political dysfunction that ripples through global financial markets and has the potential to upend Europe is something the world woke up to Tuesday morning.

What are markets really signaling, and how much danger is there for the global economy? To answer, it helps to tease apart the crosscurrents between Italian politics, European institutions, financial markets and economies worldwide.

The New Political Risk in Italy

The Italian president, Sergio Mattarella, rejected an anti-E.U. nominee for economy minister, setting the stage for elections later in the year that, if a recent pattern repeats, could put in place a parliamentary majority that is hostile to European institutions.

In effect, those events have made it more likely that there will be a showdown between authorities in Rome and officials in Brussels, Berlin and Frankfurt over deficit spending, with an unraveling of the European Union one potential outcome, even if not the most likely one.

New Italian elections would help decide whether that is the case. In the last elections, in March, populist parties skeptical of European institutions won a comfortable majority of seats in parliament, but included both right-wing and left-wing parties that have struggled since then to form a coalition.

If the populists maintain or expand their advantages in elections, it raises the prospect of serious friction between Italian politicians looking to increase spending and a European Commission, European Central Bank and German government that insist upon fiscal austerity as a condition for, among other things, continued E.C.B. purchases of Italian bonds.

As a result, the European Union is entering yet another perilous phase, after years of crises that started in Greece nine years ago. No one would confuse the latest events with the high drama of the eurozone crisis from 2010 to 2012. But the ultimate stakes are higher. Italy is a much more populous country than Greece, more at the core of the European Union, and with much higher public debt.

What the Markets Are Telling Us

The movements Tuesday — a spike in Italian bond yields, and drops in the euro and stocks worldwide — suggest that the risk of some calamitous outcome for Europe has risen after a weekend of political drama in Rome, but that it’s still an unlikely outcome.

So far, there are few signs of “contagion effects,” in which developments in Italy could create a self-fulfilling crisis in other countries with similar economic challenges. But Italy is the third-largest economy in the eurozone and has one of the largest piles of public debt in the world. A crisis there could endanger banks and investment portfolios everywhere.

The Italian government’s borrowing costs for two years soared from 0.94 percent to 2.42 percent Tuesday, as investors demanded greater compensation against the risk that the Italian government might repay them not with the rock-solid euro but with less valuable newly issued currency.

“The contagion has been really muted,” said Megan Greene, global chief economist at Manulife Asset Management. “I think investors are correctly looking at this as an Italy-specific risk for now.”

Bond investors seem pretty well persuaded that the issue here is not a broad a loss of confidence in South European nations’ ability to pay their debts. Since 2012, the European Central Bank has instilled confidence that it is willing to do“whatever it takes” — to use the memorable phrase of the E.C.B. president Mario Draghi— to preserve the euro.

Europe’s Dilemma

What is happening in Italy is more a political crisis than a financial one. Mr. Draghi’s tools arehelpful only when a country’s elected leaders are trying to avoid crisis. They are of little use if a government truly wants to break away from the rest of Europe.

Other European countries, especially powerful Germany, will have little desire to subsidize what they view as fiscal profligacy in Italy. The push toward greater economic unity across Europe since the Greek crisis has included jointly guaranteeing the continent’s banks and the E.C.B.’s purchase of government bonds.

If there is conflict, both sides have reason to work things out. Germany and European institutions certainly don’t want a crackup of the eurozone. And within Italy, the economic consequences of peeling away from Europe — high inflation and lost savings in the near term and the long-term growth consequences from being a less appealing place for investment — are severe enough that there would be reason to strike a deal.

Roberto Perli, a partner at Cornerstone Macro, puts the chance that Italy will exit the euro at only around 10 percent to 15 percent. He argues in a research note that European institutions will probably seek to de-escalate the tensions in the coming months.

The Risks for the U.S. and the World

So far the damage to markets outside Italy is mostly limited to a sell-off in global stock markets, including a 1.2 percent drop in the Standard & Poor’s 500 index Tuesday. As is often the case when the rest of the world looks risky, money flowed into Treasury bonds, lowering interest rates in the United States.

No doubt Italy has the most at risk economically, followed by the rest of Europe. But one thing that has become clear over the last decade is how effects can spread unpredictably in times of financial disruption.

For the last decade, the world has experienced a rolling series of crises, in which financial turmoil fuels economic despair which intensifies political dysfunction which — through financial markets — can spread across oceans and repeat the pattern.

No one would have thought that a crisis centered on home mortgages in the United States would prove the trigger for crises in Greece and across Europe all those years ago. If things go badly in Italy, there’s no telling where the damage could end up.

Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.” @Neil_Irwin • Facebook